Financial Services Association, April 30 (Editor Shi Zhengcheng) On Tuesday evening, Beijing time, Nick Timiraos, a well-known macro reporter known as the “Federal Reserve's microphone,” published an article looking ahead to tomorrow's (early Thursday morning Beijing time) US Federal Reserve interest rate decision and the “hawkish attitude” Powell may show.

Due to the “quiet period” before the policy meeting, Federal Reserve officials stopped publicly expressing their views on April 20. However, given that US inflation data remains high, the market expects the Fed to cut interest rates 1-2 times at most during the year.

Timiraos said that since inflation in the first three months of this year was stronger than expected, most officials may emphasize that they are prepared to keep policy interest rates in a sufficiently restrictive position for a longer period than previously anticipated. At the same time, given that there are no new economic expectations (bitmap) at this meeting, the policy statement may only change slightly, so Powell's press conference will be the most important event.

What are the highlights of Powell's press conference?

Two months ago, when January's inflation data surpassed expectations, Powell also said optimistically that this might just be a “bump” on the road to lower inflation, but the February and March data clearly shattered this optimism.

Timiraos pointed out that the main focus of this press conference is how Powell anticipates interest rates. Although most Wall Street analysts still think that interest rates may be cut 1-2 times during the year, the prospects for interest rate cuts are undoubtedly more vague than a few weeks ago, and now some analysts are calling out the “no interest rate cut in 2024” position.

From Powell's standpoint, he is likely to repeat what he said two weeks ago. At the time, he said that the data clearly did not give them more confidence that inflation would fall to 2%; on the contrary, it may take longer than expected to achieve this goal.

Let's not forget that there is also the possibility that US inflation will not be “bumpy down” towards 2%, but will continue to stay close to 3%. If there is no more obvious evidence of a downturn in the economy, this situation will be a reason to completely cancel interest rate cuts.

But it's also unlikely to become too “hawk”

Timiraos believes that Powell may admit that Fed officials have “low” confidence in when and how to cut interest rates.

According to the economic forecast for March of this year, the vast majority of Federal Reserve members expect interest rates to be cut at least twice this year, while slightly more than half of the officials think they will cut interest rates at least three times. Although officials are not required to submit new economic forecasts this week, Powell has already taken the opportunity to announce that previous expectations are out of date.

Meanwhile, Federal Reserve officials are satisfied with the current policy stance, which also makes a hawkish shift to further interest rate hikes unlikely.

Powell himself said on April 16 that if inflation continues to be at a higher level, the Federal Reserve will simply keep interest rates at the current level for a longer period of time.

As market pricing has repeatedly cut expectations of US interest rate cuts, the yield on long-term US bonds has also risen markedly. In fact, this situation achieved the effect of “tightening financial conditions” when interest rates were raised last year, which will eventually affect asset values and slow down economic momentum.

Timiraos said that although it is difficult for Powell to rule out the possibility of additional interest rate hikes in the current situation, he has become more “hawkish” — for example, implying that interest rate hikes are more likely than interest rate cuts, which is unlikely at present. Such a transformation will take longer, as well as a series of new shocks — a rapid rise in commodity prices, a renewed acceleration in wage growth, and a continued rise in inflation expectations.

Balance sheet operations

In the minutes of the March policy meeting, most Federal Reserve officials agreed to start slowing down the downsizing soon. Committee members generally prefer to reduce the rate of contraction of US Treasury bonds by half, while keeping the pace of reduction in institutional mortgage-backed securities (MBS) unchanged. Wall Street believes that the current resolution window will be the time to announce this change, and some analysts prefer the Federal Reserve to delay the official announcement in June.

Since June 2022, the Federal Reserve has continued to reduce its balance sheet at a total rate of up to 95 billion US dollars per month. Of these, the maximum monthly downsizing of US Treasury bonds is 60 billion US dollars, and the MBS reduction scale is 35 billion US dollars.

Timiraos said that the latest changes have nothing to do with interest rate settings; the Federal Reserve just wants to avoid repeating the turmoil in the overnight lending market five years ago. The downsizing itself will also reduce bank reserves in the hands of the Federal Reserve. Currently, officials don't know when reserves will fall to a level sufficient to push up interest rates on interbank loans, but many people think it is more advisable to slow down this process now, so that the downsizing process can continue for some time, while avoiding causing market turmoil.

Editor/Somer